Half of insurers globally aren't earning the cost of their capital

“The global pandemic is resurgent with yet another wave of rising case numbers and pressure on healthcare systems. Its effects on business are no less significant,” the report said. “Over the past two years, COVID-19 has accelerated some trends that look certain to reshape the way insurance is underwritten, distributed, and managed.”

COVID-19 isn’t the only issue facing the sector, however. The report stressed that “some of the issues that have challenged the industry over the past decade have not gone away, and the complexity of the macroeconomic environment has increased.”

“Revenue growth is limited in most regions; intermediaries are capturing more value; scale economies are proving elusive; and productivity is quite stagnant,” the report said. “As a result, economic profit – that is, profit after cost of capital – in the insurance industry is practically at a standstill.”

Profitability in the sector has deteriorated over the last 10 to 15 years, the report said. Profits have fallen by about 15% since 2019 – a trend particularly pronounced among life insurers and multi-line insurers.

Investors are also expressing scepticism in the industry, as half of insurers are trading below book value, the report said.

“The industry’s problems are not lost on capital markets,” the report said. “As public investors mark down companies’ shares, private investors swoop in to acquire closed books, and some insurers reconsider their geographical footprint, the fundamental structure of the industry is coming into question.”

The report said that three “structural factors” were challenging insurance industry growth:

Persistent low interest rates, which pressure spread-based businesses like life insurance
Pricing pressures driven by fee transparency, digital attackers and lower-cost options – pressures aggravated in some markets by price-comparison websites
Organic demand that is growing too slowly in mature markets

“The latter is particularly worrying, because growth in developed economies is coming mostly from price increases rather than from volume or new risks covered, highlighting a risk that the industry might lose its relevance over time,” the report said.

Brokers were the clear winners in the industry, the report said. Total returns to shareholders have been twice as high for brokers as for other insurance segments over the past 10 years. Private equity firms are investing in brokerages because that’s where the profit is in the industry – PE-backed brokerage deals accounted for about 75% of all insurance transactions in the US from 2016 to 2019, the report said.